Capital Gain Tax on Property

Introduction

Capital gains are the profits earned from the sale of an asset that has increased in value over time. This asset can be anything from stocks, real estate, or artwork. The capital gain is calculated as the difference between the purchase price and the sale price of the asset. If the sale price exceeds the purchase price, the investor has made a capital gain.

What is Capital Gains Tax In India?

One of the most sought-after investments is a residential property, mainly because you get to own a house. Some investors, however, might do so with the goal of making money when they sell the property later on. It is significant to remember that, for income tax purposes, real estate is considered a capital asset.

Long-term capital gain tax on property or the capital gain tax on the sale of the property is the tax paid on the profit earned from the sale of a property that was held for more than one year. Long-term capital gain tax is calculated based on the profit earned from the sale of the property after deducting the indexed cost of acquisition and improvement.

The tax on long-term capital gains on other financial and non-financial assets is reduced from 20% to 12.5%. While on the other hand, the indexation benefit that  was previously available on sale of long-term assets, has now been done away with. So, any sale of long term asset made after 23rd July, 2024, will attract tax rate of 12.5% only without indexation benefit.
 

Capital Gains Tax on Property for STCG and LTCG

According to the Union Budget 2024, the following changes take effect in Fiscal Years 24 and 25. 

-There will only be two holding periods—12 months and 24 months—for classifying assets as long-term and short-term. Take note: the 36-month holding period is no longer in effect.
-Twelve months is the holding term for all listed securities.
-Any listed securities that have been held for longer than a year are categorized as long-term.
-All other assets are held for a duration of 24 months. Consequently, an immovable property kept for a period longer than a year will be referred to as long-term.
-STCG will still be subject to tax at income slab rates upon the sale of the property.
-Other financial and non-financial assets are subject to a 12.5% LTCG tax instead of a 20% levy.
-The benefit of indexation that was formerly granted upon the sale of long-term assets has been removed. As a result, starting on July 23, 2024, sales of real estate will only be subject to a 12.5% tax rate (without the indexation advantage).

Tax on Equity and Debt Mutual Funds

The treatment of gains from the sale of equity funds and debt funds varies. An equity fund is any investment vehicle that makes a sizable portion of its portfolio—more than 65%—in stocks.

Gains from debt mutual funds will henceforth be taxed at slab rates and classified as short-term regardless of the holding duration, according to a recent modification to Finance Bill 2023. which implies the indexation benefit will be lost on you. Debt mutual funds were considered long-term capital assets if they were held for more than 36 months prior to April 1, 2023.

This means that in order to benefit from long-term capital gains tax, you must continue to invest in these funds for a minimum of three years. The capital gains will be added to your income and taxed at the rate specified by your income tax slab if they are redeemed within three years.

Calculation of Long-Term Capital Gains from Property

Selling real estate that has been owned for longer than 24 months results in a long-term capital gain. As previously stated, the rates for transfers made on or before July 22, 2024, after indexation benefit, will be 20%. The tax rate for transfers made after that point will be 12.5%, with no indexation advantage. Your LTCG that is subject to tax can be further reduced by taking advantage of various exemptions.

Additionally, if land or a building is sold after July 23, 2024, the taxpayer will have the choice of paying tax at 20% with indexation advantage or at 12.5% without indexation benefit provided the land or structure was acquired on or before July 22, 2024.

Calculation of Short-Term Capital Gains from Property

Depending on how long the investment was held, there are two categories of capital gains on properties. Any transfer made before the 24-month mark is classified as a short-term capital gain on the sale of property, whereas any ownership period greater than 24 months is considered a long-term capital gain.
Short Term Capital Gain = Sale Value of the Property - (Cost of Acquisition + Expenses incurred During Sale + Cost of Asset Improvement) is the formula used to calculate it.

-Sale value: The money an investor gets when they sell a certain asset is known as the sale value of a property.

-Cost of acquisition: The first price a seller pays for a property when buying it for the first time is known as the cost of acquisition. All costs related to buying a residential property, such as brokerage fees and other associated costs, are often included in the cost of purchase.

-Taxability: Based on the investor's income tax slab rate, tax will be assessed on sales of immovable properties that are completed in less than two years. For instance, if a person in the 30% tax bracket sells a property for a capital gain of ₹ 6,00,000, they will have to pay ₹ 1,80,000 in taxes when they file their income tax returns.

Tax Exemptions on Long-Term Capital Gains on Property

LTCG on a property is subject to taxation in India, but the Income Tax Act provides some exemptions to help reduce the tax liability. These exemptions are available if the proceeds from the sale are invested in certain specified assets within a specified period. The most common exemption available is under Section 54 of the Income Tax Act, which allows taxpayers to claim an exemption on LTCG tax liability if they use the sale proceeds to purchase another residential property within two years.

Capital Gain Tax on Property: Exemptions

Are you in the 30% income tax bracket or one of the higher ones? – If so, you may be required to pay an extra fee if your income tax liability exceeds a certain amount. To put it simply, an income tax surcharge is an additional tax that taxpayers who earn more than a specific amount must pay.

Rich people pay more in income taxes than poor people thanks to a surcharge provision implemented by our administration. Additionally, it offers a certain class of taxpayers minor relief on surcharges.

Tax Exemptions Available under Section 54

This clause states that an assessee may be eligible for a tax exemption if they sell residential property, a long-term capital asset, and purchase another residential property. The requirements for qualifying for the section 54 exemption are listed below.

-The only entities that can receive this benefit are people or HUFs. Businesses are not able to profit from this section.
-The taxpayer's home should be a long-term capital asset that it is selling.
-It is recommended that the property up for sale be a residential home. The revenue derived from this property ought to be categorized under the income from the dwelling property heading.
-Either a year prior to the transfer date or two years following the sale or transfer date should be used to purchase the new residential house property. When building a new home, the person has a longer window of time—three years from the date of transfer or sale—to complete the project.
-The purchased property should be a house located in India.

Tax Exemption under Section 54F

-If an asset other than a residential residence is sold, Section 54F may be claimed on long-term capital gains.
-To receive the full exemption, the entire net sale profits must be invested.
-The exemption is granted proportionately if the entire net sale profits are not invested. In this instance, the following will be exempt:
-Exemption: Net sale proceeds / capital gains x cost of new home
-When selling an old asset, a person is not permitted to own more than one residential home.
-The exemption will be revoked if the person sells the new property within three years of its purchase or construction, buys another property within two years of the sale of the original asset and it is not the new house, or builds a new home within three years of the sale of the original property and it is not the new residential property. In this scenario, the capital gains that are exempt will be subject to long-term capital gains tax.

Tax Exemption under Section 54EC

Profits earned from the sale of capital assets are subject to capital gains taxation. However, investing the gains in particular assets is one strategy to avoid this tax. Usually, this is referred to as a capital gains exemption. We shall go into great detail about one such exemption provided under Section 54EC. 

(Recent Budget 2024 Update): FM Nirmala Sitharaman has suggested raising the tax rate on short-term capital gains from 15% to 20% in the Budget 2024. Additionally, instead of 10%, long-term capital gains on both financial and non-financial capital assets will now be subject to 12.5% tax; additionally, the tax exemption ceiling for long-term capital gains has been raised to ₹ 1.25 lakhs.

Bonds Qualified for Income Tax Act Exemption Under Section 54EC:
-National Highway Authority of India (NHAI) bonds, 
-Power Finance Corporation Limited (PFC) bonds, 
-Indian Railway Finance Corporation Limited (IRFC) bonds, and 
-Rural Electrification Corporation Limited (REC) bonds.

Important Information to Get the LTCG Exemption When Investing in Capital Gains Bonds:
-The investment must be made within six months of the date the immovable property was sold in order to qualify for the tax exemption.
-Redeeming such an investment is only possible after five years. The bonds could be redeemed within three years prior to April 2018.
-The investment exemption is only valid for long-term capital gains from the sale of immovable property, which includes both buildings and land.
-The exemption is granted up to a Rs. 50 lakh limit.

Tax Exemptions Available under Section 54B

The goal of a farmer who moves from one agricultural field to another is to find another suitable piece of land, not to make money from it. Such a farmer would face hardship if they were required to pay income tax on the capital gains from the sale of agricultural land. Therefore, under section 54B of the Income Tax Act, farmers who sell one piece of agricultural land and buy another are eligible for a capital gain exemption. This is done to help these farmers.

Who Is Eligible to File an Exemption Under Income Tax Act Section 54B?
A taxpayer who satisfies all of the requirements below may claim exemption under Section 54B:

1. The taxpayer needs to be a HUF or an Individual. The corporation, LLP, or Firm are not eligible to get the benefit of exemption under Section 54.
2. Agricultural land sold by the taxpayer is eligible to be classified as a Short Term Capital Asset (land sold before 24 months) or a Long Term Capital Asset (land sold after 24 months).
3. The individual, his parent, or HUF, as the case may be, uses the agricultural land sold for agricultural purposes for two years prior to transfer.
4-The tax payer buys new farmland within two years of selling the previous farmland.
5. India should be the location of the new farmland.